As per North Dakota’s oil regulator, the state’s daily crude output remained essentially flat for second month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in May averaged 1,393,284 barrels a day, up by a marginal 799 barrels a day from April.
Drilling Activity Stays Robust
The newest numbers showed that daily crude output remained above one million barrels for the 28th month, further confirming the status of North Dakota (centered on the Bakken formation) as one of the hottest shale plays in the United States. For the record, oil volumes reached an all-time high of 1,403,808 barrels a day in January.
As a proof of the region’s stable drilling activity, rig count has been hovering in the low- to mid-60s over the past few months. Some 65 rigs were exploring in the state in May, compared with the April count of 63. The all-time low of 27 was set in May 2016, while a year ago (i.e. in May 2018), North Dakota had 62 rigs operating.
Concerns Over Gas Flaring, Worker Shortage
It is believed that North Dakota oil production would have hit a new all-time high by now but for structural challenges like natural gas flaring. Operators are experiencing some growing pains as natural gas output – a largely unwanted derivative that emerges alongside oil production in the region – outpaces gathering and processing capacity, leading to increased flaring.
Companies flared about 19% of gas extracted in North Dakota in May, significantly exceeding the statewide limit of 12%. In the absence of adequate pipelines and storage capacity to take care of the natural gas churned out, the only other option for shale drillers to limit flaring is to reduce oil production. The flaring, which could also lead to greenhouse gas emissions like methane, will force producers to ‘self-restrict’ oil production until more natural gas infrastructure is built.
The North Dakota energy industry is also hamstrung by a labor shortage, with the region in need of 30,000 new workers.
Production Surge Outpace Pipeline Capacity
One of the major factors for the revival of Bakken activity is the construction of 1,170-mile-long Dakota Access Pipeline. Energy Transfer L.P.’s ET mega project came online in June 2017 and is currently equipped to carry about 570,000 barrels of oil per day (or more than 40% of North Dakota’s output). The pipeline, with investments from energy majors like Phillips 66 PSX, Enbridge Inc. ENB and Marathon Petroleum MPC, has helped to improve the region’s drilling economics by lowering transportation costs for operators. In fact, large operators like Oasis Petroleum Inc. OAS utilize the Dakota Access Pipeline to send a major portion of their products to market.
Amid high demand, there is a need for infrastructure that can allow for the movement of more oil. The proposed Liberty Pipeline, which will provide opportunity to shippers to secure transportation service from the Bakken production areas to Corpus Christi, TX, and almost doubling the capacity of the Dakota Access Pipeline to 1.1 million barrels per day, are touted as solutions.
While the $1.6 billion Liberty pipeline will have an initial throughput capacity of 350,000 barrels per day and is expected to start operations in another two years, Energy Transfer has launched an open season to test volume commitments for the Dakota Access Pipeline expansion.
What Lies Ahead?
While the abovementioned issues could stall North Dakota oil growth engine for the time being, production is nevertheless expected to remain robust on steady oil prices. Though a number of companies have built sizeable acreage positions in North Dakota, we have shortlisted three of them – Hess Corporation HES, Oasis Petroleum and Marathon Oil Corporation MRO – that might warrant attention. Each carrying Zacks Rank #3, the companies own significant positions at the core of the Bakken shale play of North Dakota.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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